Why American Eagle may close more than 150 stores

Clothing retailer American Eagle Outfitters Inc. is preparing to close more than 150 stores over the next three years.

Company executives were quick to emphasize the importance of cost-cutting as a corporate priority on its conference call with analysts Wednesday after reporting a quarter of accelerating sales declines.

Executives also left open the possibility that more stores could close.

American Eagle (NYSE: AEO) executives also outlined other areas for potential cost-cutting as it works to re-establish sales growth through new fast fashion initiatives, a shift in emphasis to an omni-channel strategy and more licensed international expansion.

"We are cutting expenses across the organization," said Jay Schottenstein, interim CEO and executive chairman.

That includes simplifying the company's structure "across all levels of business" as well as eliminating redundancies and corporate overhead.

The company reported total net revenue declined by 5 percent, dropping from $679 million last year to $646 million. Gross profit dropped 15 percent in a business environment of aggressive discounting for fashion retail.

While sales from international and factory outlets helped to bolster overall sales totals, American Eagle also reported same-store sales decreased by 10 percent, a doubling of the 5 percent declines the retailer reported last year, a key measure of a retailer's health.

American Eagle CFO Mary Boland said the company's sales trends, which where in keeping with its guidance, suggested the potential for more store closings to come.

"There's additional 300 stores with leases expiring in the next three years which will be...looked at for potential closing," she said. "We've also been working hard to negotiate rent reduction and lease flexibility."

Those 300 leases could represent more than one third of the retailer's overall store count, now more than 1,000, but facing a potential reduction to less than 900 with the planned closings announced with the earnings report.

The total of 70 stores closing in North America this year, said Boland, includes 70 American Eagle stores and 20 Aerie locations. The company reported 100 of the total 150 stores slated to close will be American Eagle stores.

The stores will closing at the end of their leases, avoiding any lease acceleration costs.

Roger Markfield, the company's executive creative director, said the company was not satisfied with the merchandize mix in its stores while also describing a difficult retail environment for the retailer's core customer of teen shoppers.

"The product assortment isn't quite what it needed to be," he said. "Clearly, markdowns were not where we liked them."

The retailer's executive team repeatedly emphasized the importance of building out its omnichannel strategy, which seeks to combine the advantages of its e-commerce business with its stores, including ship-from stores option.

American Eagle will soon open its new distribution center in eastern Pennsylvania. The new distribution center, located close to the population centers along the East Coast, will increase the reach of the retailer to more quickly ship its product to its customers. American Eagle can ship its product within two days to 60 percent of its customers. The new distribution center will expand it to 90 percent.

"We feel very good about our ability to execute on that in the back half of the year," Schottenstein said.